Raising wages and cutting tax is better than complex and expensive redistribution

Robin Walker, Worcester’s MP has written to the Chancellor to express his support for a national living wage and a higher income tax threshold as the best way to help working families rather than the complex and expensive system of tax credits that was introduced by Gordon Brown. MPs rejected Labour’s motion in the Commons to cancel tax credit changes yesterday after it emerged this would create a multi-billion pound black hole in public finances threatening spending on the NHS and schools. 

Robin has consistently support cutting taxes for working families by raising the income tax threshold and spoke as long ago as 2013 about the importance of raising that threshold all the way up to the level of someone working full time on the minimum wage. He also supported the introduction of a new national living wage which will see the level of the minimum wage for those over 25 rise from £5.70 at the start of the 2015 Parliament to £9 by the end of it.

He spoke in a debate two years ago to point out that the system of tax credits was not a fundamental part of the welfare state but an innovation designed by Gordon Brown to top up the pay of those on low wages. He argued that it had become distorted over time so that a system which in 1998 spent £1 billion on those who were lowest paid, more than trebled in its costs and ended up subsidising low pay. Alistair Darling, the Former Chancellor under Brown has admitted that tax credits had the unforeseen consequence of keeping low wages down and has regreted that Labour did not do more to reform them when they were in office. Ken Clarke pointed out in yesterday’s debate how they increased during Labour’s time in office, not for any fundamental reason of fairness but as a series of pre-election bribes.

Despite more than trebling in its costs under Labour, tax credits failed to reduce in work poverty and over the period 1999 to 2010 in work poverty increased by 20%. The system saw the vast majority of taxpayers paying more tax in order for some to receive a proportion of that back from the HMRC in tax credits, it ended up affecting 9 out of 10 working families including above average earners such as MPs.

The proposed changes to tax credits will reduce the number of people receiving them from 6 out of 10 currently to 5 out of 10 and bring the total cost of the system back to where it was in 2008.

Alongside the changes to tax credits, we are introducing the National Living Wage, which will be worth over £9 an hour by 2020, and increasing the personal tax allowance, as part of a single, thought-through coherent plan. The new National Living Wage means someone working full-time on the current National Minimum Wage will see a pay rise of nearly £1,000 gross next year and around £5,000 by 2020. While our commitment to increase the tax free Personal Allowance to £12,500 means a typical taxpayer will be paying £1,205 less income tax in 2020 than in 2010. 

Below are some illustrative examples of how families in Worcester and across the UK will benefit over the Parliament when you take all of the welfare and tax changes announced in the Budget as a whole: 

• A couple with two children where only one parent is in work on the current National Minimum Wage will see their income increase by £2,480. 

• A lone parent with one child working 35 hours at the current National Minimum Wage will see their income increase by £1,550. 

• A family with two children where both parents are working 35 hours a week on the National Minimum Wage will see their income increase by £5,570. 

• A single person with no children working 35 hours on the current National Minimum Wage will see their income increase by £2,110. 

There will also be a wider ripple effect from the National Living Wage pushing up wages above the current National Minimum Wage and we are committed to doubling free childcare for working parents of 3 and 4 year olds, providing £5,000 of support to working parents. As PPS at the Department of Education Robin will be supporting the Secretary of State in delivering reforms that will double the amount of free childcare available to working families.

No independent analysis has yet been able to take into account all of these factors with the wider ripple effect set to benefit more than 3 million working people. However, we have already seen some of the wider positive effects this will have with over 200 companies agreeing to pay at or above the National Living Wage before its introduction. Robin recently welcomed announcements from Lidl and Costa coffee, both in Worcester that they would raise wages above the level set by the Government.

It was also pointed out in yesterday’s debate that in opposing £4 billion of welfare spending cuts but offering no alternative way of raising money, the Labour party was either threatening spending on hospitals, schools or other vital areas of Government spending or threatening to add to the UK’s burden of debt. The Former Chancellor, Ken Clarke said

“I will conclude by turning to the rather big question of the £4 billion that will be lost by this motion. We are having a cheery knockabout argument and £4 billion is going out the window, and neither the Labour party nor the Scottish National Party can agree on any credible explanation of what they will do about that. They will borrow the money; that is what they did and that is what they will do.”

Robin has written to the Chancellor supporting the case for reforming tax credits and adding

“Of course like many others I would like to see the impact on those worst affected in any one year minimised so that nobody should see a stark loss of income, however I feel that the IFS analysis and much of the media discourse on the proposed changes is misleading as it presents a one off snapshot of what changes to tax credits could mean, without the analysis of the cumulative impact of wage rises, higher employment and tax changes over a number of years running up to it and continuing beyond. We need to take on this narrative and show how people are being liberated from dependence on tax credits by higher pay, more job opportunities and lower taxes.”

“We need to make the moral case for why it is wrong that working people should be asked to subsidise the wages of others rather than have people paid a proper wage in the first place. You took a huge stride forwards with this argument when you introduced the National Living Wage at your budget earlier this year and we need to keep up the argument as the party of a proper living wage combined with lower tax, which will really make work pay.”

“Many of the groups making the case against tax credit reform are looking at the issue straightforwardly as an income equation of what happens in this single year. We need to move the argument on to a much broader one about the moral and financial efficacy of the state “topping up” people’s wages. It is a waste of resource to have people pay money into the system, run it through the Government machine and then receive it some of it back in handouts but more importantly, it undermines the essential value of their own work and their independence. “ 

“We also need to make the case that by reforming welfare we are protecting vital spending budgets elsewhere and maintaining investment in our education system, apprenticeships and skills that can help people to make more of their potential and earn more over their lifetimes.“

Commenting on the decision of the Commons and the overall impact of the budget Robin said

“These changes are starting to build the lower welfare, lower tax, higher wage economy we need to balance the books, improve living standards and spread prosperity. More importantly rising wages, more jobs and economic growth are making Britain better off. 

“The same people who are now arguing they changes will make people poorer are those who promised a triple dip recession and higher unemployment in the last Parliament when instead we saw economic growth and record employment. They are the same people who said we would be better off in the Euro and that they had ended boom and bust.”

“The alternative to finding these savings in welfare spending would be to increase borrowing, raise taxes or cut valuable public services like the NHS and schools. None of these options would be right for Britain. I am proud to serve in a Government that is reforming welfare, investing in our NHS and committed to delivering fairer funding for schools, more childcare and more apprenticeships. All these things will make Britain a better place in the future.”